'An elephant starting to run': With China's economy slowing, all eyes turn to India in search of growth

When Donald Trump, who is no stranger to Twitter hyperbole, describes a meeting with another world leader as “hopefully historic,” it’s hard not to consider it a case of damning with faint praise. But that’s the way he described his talks with Xi Jinping, China’s president, in Argentina at the G20 summit last week. And no wonder. Days after the summit, what kind of trade truce the two superpowers actually struck seems to depend on which White House official you listen to, which Chinese state-controlled media outlet you read, or which way the wind is blowing. At best, it looks like the U.S. has agreed to withhold raising the tariff rate on US$250 billion worth of Chinese imports for 90 days while negotiators try to work out a longer-term deal. Hopefully.

In any event, investors who had been hoping for even a short-term respite from trade jitters — and the gathering storm of global economic gloom — didn’t get much of one from the G20. And until there’s clarity, worries over China’s economic growth won’t diminish. The International Monetary Fund’s forecast for GDP growth this year — 6.6 per cent — will already be the lowest mark since 2001, when China joined the World Trade Organization. If next year’s IMF projection — revised down to 6.2 per cent in October, in part thanks to the Trump tariffs — proves accurate, the China slowdown will be even more severe. From 2000 to 2014, China’s average annual growth was 9.6 per cent; from 2015 to 2019, the average will be about 6.8 per cent.

With China slowing, where can the world turn in search of growth? Well, the mantle of fastest-growing big economy now rests squarely on the shoulders of India, which the IMF has dubbed “an elephant starting to run.” Now the sixth-largest economy in the world — surpassing France earlier this year, for what it’s worth — India accounts for about 15 per cent of global growth. The IMF pegs India’s fiscal 2018/19 GDP growth (India measures GDP from April through to the following March) at 7.3 per cent, up from 6.7 per cent the previous year. The Reserve Bank of India is a little more optimistic, predicting 7.4-per-cent growth this fiscal and 7.5 per cent in the first half of FY 2019/2020.

And there’s potential for more, not only because in theory, at least, India should be relatively insulated from rising trade protectionism. Its workforce is young, and about two-thirds of the population is of working age. With consistent fast growth, hopes are running high that the country’s middle class will bloom — some estimates put it at more than a half-billion people by 2025. Foreign multinationals are reportedly pouring money into buying up Indian consumer products assets, one of the reasons there have been more inbound mergers and acquisitions in India than in China so far this year.

Beyond demographics, the more business-friendly policies of Narendra Modi’s BJP government can also take credit for India’s pace-setting growth. It introduced a long-overdue goods and services tax last year, and tackled black money in 2016 with its controversial demonetization scheme. Critics have rightly charged that the implementation of both was botched, but let’s face it: in a country as politically, socially and economically complex as India, no good will ever be implemented without some degree of botch.

So is now the time for Western investors and businesses to turn to India? The potential is huge, of course, but so are the challenges.

For investors specifically, Indian stocks, which are trading at almost 20 times earnings, are hardly cheap by emerging market standards. And there are risks to the growth expectations underpinning that valuation.

One of them is political. A general election will be held next spring, and Modi’s re-election is far from assured. The rupee has been battered this year as the dollar has soared, meaning that Indians are paying more, especially for fuel. On that note, while inflation has remained largely in check by Indian standards, the country is a heavy importer of energy — if prices rise dramatically, so will inflation. Economic growth has been strong, but income inequality seems to be on the rise. Demonetization and the GST have not exactly been popular, especially in rural areas. In short, while opinion polls suggest Modi will win, a lot can happen between now and next spring.

Another negative is that India remains a very difficult place to do business, despite Modi’s attempts at some reform. Labour laws and retrospective taxes drive foreign companies into fits. The banking system remains fragile and saddled with bad debts. Corruption and slow-moving bureaucracy are constant roadblocks. So is the judiciary. The government at long last has introduced a reasonable bankruptcy law that combats the impunity with which controlling shareholders can renege on corporate debts — legislation that could go a long way to improving bank balance sheets — but proceedings in some high-profile cases so far have been mired down in the courts, whose backlogs are huge.

And finally, the biggest challenge to Indian growth might be growth itself. In order to capitalize on its demographic potential, the country requires massive investments in education, infrastructure and technology to build capacity. Where will the money come from? Opening up to foreign investment is key, and Modi has made some headway to do so, but it’s not clear it’s working: growth in foreign direct investment hit its slowest pace in five years this summer.

So even with China slowing, the rest of the world is waiting to see how the Indian growth story unfolds — before hitching a ride on the elephant.